What Is the Purpose of Finance?
Finance involves borrowing & lending, investing, raising capital, and selling & trading securities. The purpose of these pursuits is to allow companies and individuals to fund certain activities or projects today, to be repaid in the future based on income streams generated from those activities. Without finance, people would not be able to afford to buy homes (entirely in cash), and companies would not be able to grow and expand as they can today. Finance, therefore, allows for the more efficient allocation of capital resources.
What Are the Basic Areas of Finance?
Finance is generally divided into these three basic areas:
- Public finance includes tax, spending, budgeting, and debt issuance policies that affect how a government pays for the services it provides to the public
- Corporate finance refers to the financial activities related to running a company or business, usually with a division or department set up to oversee those financial activities.
- Personal finance involves money matters for individuals and their families, including budgeting, strategizing, saving and investing, purchasing financial products, and safeguarding assets. Banking is also considered a component of personal finance.
Finance vs. Economics
Economics and finance are interrelated, informing and influencing each other. Investors care about economic data because they also influence the markets to a great degree. It’s important for investors to avoid “either/or” arguments regarding economics and finance; both are important and have valid applications.
In general, the focus of economics—especially macroeconomics—tends to be a bigger picture in nature, such as how a country, region, or market is performing. Economics also can focus on public policy, while the focus of finance is more individual, company- or industry-specific.
Microeconomics explains what to expect if certain conditions change on the industry, firm, or individual level. If a manufacturer raises the prices of cars, microeconomics says consumers will tend to buy fewer than before. If a major copper mine collapses in South America, the price of copper will tend to increase, because supply is restricted.
Finance also focuses on how companies and investors evaluate risk and return. Historically, economics has been more theoretical and finance more practical, but in the last 20 years, the distinction has become much less pronounced.